How Much Tax Does an LLC Actually Pay?

A Limited Liability Company (LLC) is a flexible business structure that offers liability protection, separating owners’ personal assets from business debts and obligations. An LLC does not automatically default to a specific federal income tax classification; its tax treatment depends on how it is structured or how its owners elect for it to be taxed. This adaptability allows businesses to choose a tax structure that best suits their operational and financial goals.

Understanding Federal Income Tax for LLCs

An LLC’s federal income tax treatment largely depends on its number of owners and any elections made with the Internal Revenue Service (IRS). The distinction between the LLC entity and its owners is important when considering federal income tax. The LLC itself generally does not pay federal income tax on its profits in its default classifications.

Single-Member LLC

For federal income tax purposes, a single-member LLC is typically treated as a “disregarded entity.” This means the LLC’s income and losses are reported directly on the owner’s personal tax return, specifically on Schedule C (Form 1040).

Multi-Member LLC (Partnership)

When an LLC has multiple members, it is generally taxed as a partnership by default. As a pass-through entity, profits and losses are passed through to the individual members. The LLC files an informational return with the IRS, Form 1065, to report its financial performance. Each member receives a Schedule K-1 from the LLC, detailing their share of the partnership’s income, deductions, credits, and losses. Members use this Schedule K-1 to report their shares on their individual tax returns (Form 1040).

S Corporation Election

An LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS. This election allows the LLC to retain its pass-through tax status. Owner-employees can take a “reasonable salary” subject to payroll taxes, while any remaining distributions of profits may not be subject to self-employment tax.

C Corporation Election

Alternatively, an LLC can elect to be taxed as a C corporation by filing Form 8832 with the IRS. In this structure, the LLC becomes a separate taxable entity, and its profits are subject to corporate income tax rates. C corporation taxation involves “double taxation,” where the corporation pays tax on its profits, and shareholders pay a second tax on those profits if they are later distributed as dividends.

Other Federal Tax Obligations for LLCs

Beyond federal income tax, LLCs may have other federal tax responsibilities, particularly if they have employees or engage in specific business activities. These obligations are distinct from the income tax treatment of the LLC’s profits or owners.

Employment Taxes

If an LLC hires employees, it is responsible for federal employment taxes. These include withholding and paying FICA taxes (Social Security and Medicare) from employee wages, with the LLC paying a matching portion. The LLC may also be subject to the Federal Unemployment Tax Act (FUTA) tax, paid solely by the employer. These obligations are reported to the IRS, typically on Form 941 or Form 944.

Self-Employment Tax

Owners of LLCs taxed as sole proprietorships or partnerships pay self-employment tax on their share of business profits. This tax covers their contributions to Social Security and Medicare, similar to FICA taxes. For 2025, the self-employment tax rate is 15.3%, applied to net earnings, and is calculated on Schedule SE (Form 1040).

Excise Taxes

Some LLCs engaged in specific industries or selling particular goods or services may be subject to federal excise taxes. These taxes apply to certain products, services, or activities, such as fuel, environmental pollutants, or luxury goods. They are generally reported and paid separately from income and employment taxes.

State and Local Tax Considerations for LLCs

Beyond federal taxes, LLCs must navigate state and local tax obligations, which vary significantly by jurisdiction. The specific taxes an LLC faces depend on where it operates and the nature of its business activities.

State Income Tax

Many states impose their own income taxes on businesses. Some states follow the federal pass-through treatment for LLCs, with income flowing through to owners’ personal state income tax returns. Other states may impose entity-level taxes on LLCs, or tax an LLC as a corporation if it has elected C-corp status federally. Some states also require composite returns for non-resident members, where the LLC pays state income tax on behalf of its out-of-state owners.

Annual Fees and Franchise Taxes

Many states levy an annual fee or franchise tax on LLCs for the privilege of doing business, regardless of whether the LLC generates income. These fees can be a flat amount or based on factors such as the LLC’s revenue, net worth, or the number of members.

Gross Receipts Taxes

Some states or localities impose gross receipts taxes, which are levied on an LLC’s total revenue, without deductions for business expenses. Unlike a sales tax, which is typically collected from the customer, a gross receipts tax is assessed directly on the business.

Sales and Use Taxes

If an LLC sells taxable goods or services, it is generally responsible for collecting and remitting state and local sales taxes. The obligation to collect sales tax often depends on whether the LLC has a “nexus” in a state, which can include a physical presence or meeting economic thresholds based on sales volume.

Property Taxes

LLCs that own real estate or significant tangible personal property may be subject to state and local property taxes. Real property taxes are assessed on land and buildings, while personal property taxes apply to movable assets like equipment and inventory. These taxes are typically calculated based on the assessed value of the property.

Local Business Taxes

Cities and counties may also impose local business taxes, such as business license fees or local income taxes. These obligations are often tied to the specific municipality or county where the LLC operates.